BUENOS AIRES (Reuters) - Two years
after seizing the country's biggest energy company from Spain's
Repsol, Argentina hopes a new compensation deal will lure more
foreign investment to what many believe to be some of the world's
most promising shale oil and gas prospects.

But the deal ending a bitter dispute between Argentina and the
Spanish oil company may prove only a first step in dispelling
investor concerns about economic conditions and energy policy in the
South American country.

Repsol on Tuesday announced that its board of directors had approved
a $5 billion settlement with Argentina after President Cristina
Fernandez expropriated 51 percent of Repsol's stake in energy
company YPF <YPFD.BA>.

"The world can accept that a government takes an oil company into
state hands, but only if you pay for it," said Victor Bronstein, a
Buenos Aires-based oil analyst.

Fernandez is betting the settlement will clear the way for Argentina
to pursue investments from international oil companies to develop
Vaca Muerta, Spanish for "Dead Cow," a formation in the country's
Patagonia region that potentially holds one of the world's biggest
shale reserves.

"The agreement was absolutely necessary but it's not enough to
unleash a boom in investments," said Jorge Lapena, president of the
Institute of Energy General Mosconi and a former Argentine energy
secretary. "What's needed is a long-term energy plan, and the
country doesn't have that right now."

Argentina is seeking financing and technological expertise to
develop Vaca Muerta, but international investors, some worried about
possible legal threats from Repsol before the announced agreement,
have been reluctant to participate in large-scale development.

The success that Argentina achieves in attracting more companies to
the mega field will depend on what steps the government takes to
improve the country's economic conditions.

They include the elevated costs of operating in a country with one
of the world's highest inflation rates and tough foreign exchange
controls.

There are few signs those issues will be resolved in the near term.
Fernandez, whose presidency ends next year, is struggling to contain
inflation now running around 30 percent and to preserve Argentina's
dwindling currency reserves.

Analysts said the cost to develop a well at Vaca Muerta could run
between $8 million and $10 million compared with between $2 million
and $3 million in the United States, where shale drilling is already
key to energy supplies.

That means Argentina will need to lure mammoth amounts of capital in
order for the Vaca Muerta project to proceed more quickly. YPF has
said it will need $250 billion to develop Vaca Muerta.

A U.S. Department of Energy report shows that Argentina has more
natural gas trapped in shale rock than all of Europe, a
774-trillion-cubic-feet bounty that could transform the outlook for
Western Hemisphere supply.

The country's shale gas reserves trail only China and the United
States.

Fernandez has billed the YPF takeover as a fresh start for
Argentina's energy industry, which has seen a decline in recent
years in oil and gas production and the country's hydrocarbon
reserves.

The drops in production and reserves have triggered a chronic energy
deficit in Argentina, meaning energy imports exceed exports, putting
pressure on government coffers.

In 2012, Argentina raised natural gas prices at the well in an
attempt to encourage increased production.

Since Fernandez's decision to seize YPF, the government has signed
one major Vaca Muerta deal, a $1.24 billion joint venture with
U.S.-based Chevron Corp. <CVX.N>

Several other companies have signed on to smaller projects,
including ExxonMobil <XOM.N>, Total <TOTF.PA>, and Royal Dutch Shell
<RDSa.L>.

Earlier this month, YPF said it signed an agreement with Malaysian
state-owned oil company Petronas for a possible investment in Vaca
Muerta.

Brazilian oil company Petrobras <PETR4.SA> said on Tuesday it is
looking to boost oil exploration and production in Argentina.

To get the Chevron deal done, the government loosened its foreign
exchange regulations for the company and also reduced import taxes
on drilling equipment.

The energy institute's Lapena said the government needs to lay out
broader policies to help more companies have a clear understanding
of the investment terms in Vaca Muerta.

"We can't have a case-by-case policy, we need a general policy," he
said.